Morning Star Ltd was registered on 1 July 2018, as a company with a constitution

Question 1

Morning Star Ltd was registered on 1 July 2018, as a company with a constitution limiting the shares that could be offered to 5 000 000 Ordinary shares (including all classes) and 2 000 000 preference shares. The company issued a prospectus dated 1 July 2018 inviting the public to apply for 3 000 000 Ordinary A class shares at $3.00 per share. The terms of the shares on issue are $1.50 on application, $1.00 on allotment and $0.50 to be called within six months of allotment before 31 December 2018.

If the issue is oversubscribed the directors will make a pro-rata issue of shares and the excess application money will be applied to allotment and calls before any refunds will be given.

On 15 July, the directors also decided to issue 1 000 000 non-voting Ordinary B shares as fully paid to the promoters for a payment of $1.50 per share.

On 30 July applications closed. Applications for 4 500 000 shares in total had been received with applicants for 3 000 000 shares paying the full price and 1 500 000 shares paying only the application fee.

On 1 August, the shares were allotted with all allotment money owed paid by the 30 August.

The company paid share issue costs of $50,000 for the issuing of Ordinary A shares on 1 September. The share issue costs related to legal expenses associated with the share issue and fees associated with the drafting and advertising of the prospectus and share issue.

The call on the Ordinary A shares was made on 15 Septmber and due by 30 September. All call money was received except for the call on 50 000 shares. The directors met and forfeited the shares on 15 October. On 30 October the forfeited shares were reissued at $2.50 fully paid to $3.00. Costs associated with reissuing the forfeited shares totalled $5,000. The remaining money was refunded to the defaulting shareholders on 15 November.

The directors decided on 1 November to make a one-day offer of a non-renouceable rights issue to existing Ordinary A shareholders to purchase additional shares at $1.5 each for every 10 shares of holding. Holders of 1 000 000 shars exercised their right.

On 1 January 2019, Morning Star Ltd issued via a private placement semi-annual coupon debentures (which pay interest every 6 months) with a nominal value of $300,000. The debenture term is five years and the coupon rate is 8% per year. The market requires a rate of return of 10% per year. The money came in and the debentures were allotted on the same date.

The company issued via a private placement 1 million redeemable preference shares of $1.50 each on 30 June 2019. The shares offer a rate of return of 7 per cent per annum. The shares are later redeemed to non-voting Ordinary Class B shares at the options of the shareholders on 30 June 2021.

Required:

(a) Prepare journal entries for the above transactions. Note: the entries should be in strict date order of the underlying event.

(b) Prepare the shareholder’s capital account of Morning Star Ltd as at 30 June 2019 and 30 June 2021.

Question 2

The profit before tax, as reported in the statement of profit and loss for Aileen Ltd for the year ended 30 June 2019, amounted to $100,000, including the following revenue and expense items

Revenues

Sales revenue

$650,000

Interest revenue

50,000

Government grant

50,000

Proceeds on sale on equipment

15,000

Expenses

Cost of goods sold

400,000

Bad debts expense

10,000

Carrying amount of equipment sold

5,000

Depreciation expense – equipment

4,500

Depreciation expense – plant

20,000

Research and development expense

80,000

Wages expense

120,000

Long service leave expense

20,000

The draft statement of financial position of Aileen Ltd at 30 June 2019 and the statement from last year showed the following assets and liabilities:

2018

2019

Assets

Cash

$30,000

$30,000

Inventory

100,000

150,000

Accounts receivable

50,000

70,000

Allowance for doubtful debts

(5,000)

(10,000)

Interest receivable

25,000

20,000

Equipment-cost

30,000

30,000

Accumulated depreciation-equipment

(9,000)

(13,500)

Plant-cost

200,000

200,000

Accumulated depreciation-plant

(37,000)

(55,500)

Goodwill

15,000

15,000

Deferred tax asset

33,000

Liabilities

Accounts payable

60,000

40,000

Wages payable

50,000

80,000

Revenue received in advance

20,000

Loan payable

200,000

100,000

Provision for long-service leave

40,000

30,000

Deferred tax liability

24,000

Additional information:

In the year ended 30 June 2018, Aileen Ltd had a tax loss of $65,000 that it carried over in the deferred tax asset. In June 2019, the company received an amended assessment for the year ended 30 June 2019 from the ATO, indicating that an amount of $5,000 claimed as a deduction has been disallowed. Aileen Ltd has not yet adjusted its accounts to reflect the amendment. The remaining losses can be used to offset taxable incomes in future

Amounts received from sales, including those on credit terms, are taxed at the time the sale is made. All other general taxation rules apply.

The depreciation regimes for the financial reports and the company income tax return respectively, are listed below.

Depreciation Regimes

Equipment

Plant

Depreciation rate:

Accounting

15%

10 yrs

Tax

30%

8 yrs

Method:

Accounting

Straight-line

Straight-line

Tax

Reducing Balance

Straight-line

Residual:

Zero

$15,000

All research and development expenses were paid in cash during the year ended 30 June

The company tax rate is assumed to be 30% for the year ended 30 June 2018 and 28% for the year ended 30 June 2019. The balances of the deferred tax accounts at 30 June 2018 are still reflecting the 30% tax rate.

All movements of deferred tax accounts during the year are not yet recongised.

REQUIRED:

Determine the taxable profit for the year ended 30 June 2019., Start from the accounting profit before tax and show the adjustments for differences between taxation and accounting rules.

Complete the worksheet on the additional page provided to determine the movements in the deferred tax accounts for the year ended 30 June 2019.

Prepare the journal entries to recognise the current tax liability and the final deferred tax adjustments for the year ended 30 June 2019. Exclude the movements during the year due to carry-forward tax loss and change in tax rate. Note Adeline Ltd does not set off the deferred tax accounts against each other.

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